Kevin Drum

Where Has All the Money Gone?

| Fri Apr. 9, 2010 2:58 PM EDT

Business Insider promises us today "15 Mind-Blowing Charts About Wealth And Inequality In America." I don't think any of them will come as a big surprise to readers of this blog, but it's nice to see them all in one place. Below is the chart on average hourly earnings, which I've modified to show (approximately) what it would look like if you added income in the form of rising healthcare premiums. Basically, even if you do that, average income has only increased from $20/hour in 1972 to about $23/hour today. That's roughly 12% over four decades, or about 0.3% per year, during an era in which per-capita productivity has grown at something like five times that rate. Our economy has generated a ton of increased income over the past few decades, but hardly any of it has trickled down to the average worker.

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The Other Shoe

| Fri Apr. 9, 2010 2:13 PM EDT

Felix Salmon is relatively sanguine about Greece's problems:

The first option is default. If it happens, it'll happen, as Thomas says, in the form of a debt restructuring....Debt restructurings are messy and unpleasant things at the best of times, but what we're really talking about here is the sovereign equivalent of a loan modification which, if it goes according to plan, makes both the borrower and the lender better off. What we're most emphatically not talking about here is an Argentina-style default, where the country simply unilaterally stops paying any interest on its debt, and then takes years to address the issue, trying to drive the hardest bargain it can all the while.

Then there's devaluation. If Greece leaves the euro, that would allow it to devalue its currency. If it redenominated its debt from euros into drachmas, that alone would constitute a default, even without a bond exchange. But again, in the event that Greece did leave the euro, it wouldn't see its currency plunge overnight to a third of its previous value, as Argentina did.

First question: is leaving the eurozone a realistic option? Quite a while ago Barry Eichengreen persuaded me that it wasn't, and I haven't seen anything since then to change my mind.

As for default — well, maybe Greece's version will be kinder and gentler than Argentina's. And maybe that will work out. But Peter Boone and Simon Johnson are skeptical:

The default on debt would have major ramifications. The government would need to take actions to avoid a run on all the Greek banks — this would need to be coordinated with the ECB to ensure there was liquidity support. Private creditors would pull loans wherever possible from Greek entities. In short: Greece would suffer a large financial and economic collapse, and GDP would decline substantially.

This financial collapse would mean Greek debt would need to be written down substantially. We would guess that a 65% write down of face value, bringing total Greek debt to around 50-60% of a lower new GDP, would be reasonable. Such write downs roughly match the terms that Argentina received after its debt restructuring.

This draconian cut to government debt would not solve Greece’s problems. It would still need to cut budget spending in order to lower the deficit — and in the aftermath of defaults, there are generally few sympathizers. Greece could save on interest (which to data it never paid in any case), but it would not be a panacea for the budget or economy.

For what it's worth, I think I'm in the pessimistic camp. Everyone keeps waiting for the other shoe to drop in Greece, and it's hard to believe that it's not going to happen soon. As every shaky financial firm learns, there's a tipping point at which the market isn't just skeptical anymore, it's actively attacking you and working toward your demise. That point doesn't seem too far away to me, and when it happens everyone is going to go into full scale panic mode. And there's no guarantee that the fallout will be restricted to Greece.

But that's just my gut reaction, and I'm an inherent pessimist. Maybe things won't turn out as badly as I think.

The Shack

| Fri Apr. 9, 2010 1:11 PM EDT

Every once in a while you run across something that makes you feel like an idiot. Or, maybe not an idiot exactly, but certainly out of touch with a big chunk of the world. That happens to me regularly since I don't watch American Idol or imbibe much popular culture, which means there are huge swaths of American life that I'm ignorant of. But books? That's different. And yet, yesterday Tyler Cowen linked to a list of 2009 bestsellers, and down in the trade paperback category here's what led the list:

The Shack: Where Tragedy Confronts Eternity. William P. Young. Orig. Windblown (3,595,467).

The Shack? And it sold 3.5 million copies? That doesn't quite make it the biggest selling book of the year (Dan Brown gets that honor), but it's a pretty strong second and a massive publishing phenomenon. And I've never heard of it. For the record, here's the Wikipedia summary:

Young originally wrote The Shack as a Christmas gift for his six children with no apparent intention of publishing it. After letting several friends read the book he was urged to publish it for the general public. In 2006, Young worked closely with Wayne Jacobsen, Brad Cummings (former pastors from Los Angeles) and Bobby Downes (filmmaker) to bring the book to publication. They had no success with either religious or secular publishers, so they formed Wind Blown Media for the sole purpose of publishing this one book.

....The Shack went largely unnoticed for over a year after its initial publication, but suddenly became a very popular seller in the summer of 2008, when it debuted at number 1 on the New York Times paperback fiction best sellers list on June 8. Its success was the result of word of mouth promotion in churches and Christian-themed radio, websites, and blogs....As of January 2010, The Shack had over 7 million copies in print, and had been at number 1 on the New York Times best seller list for 70 weeks.

This is a really fascinating story — and obviously since it was a NYT #1 bestseller for 70 weeks it's not exactly a big secret. Still, I'd never heard of it. Why? Even if I don't make a habit of reading the NYT bestseller list or perusing Christian websites, this is a big enough phenomenon that you'd think I would have seen it on CNN or the Washington Post or Newsweek or something. But I haven't. Is it just me? Or has it somehow not generated much mainstream attention even though it's practically a made-for-Hollywood story?

UPDATE: Douglas Harrison, an English professor at Florida Gulf Coast University, emails to add this:

You haven’t heard about it for the same you reason you probably didn’t hear about Rick Warren’s Purpose Driven Life series of books until Warren become a lightning rod figure in the news or about the Gaither Homecoming Friends Gospel Music Series, which outsold Elton John, Fleetwood Mac and Rod Stewart for worldwide ticket sales not too long ago. MSM and mainstream American culture just doesn’t know where to look and/or how to talk about or take seriously evangelical culture if it’s not through the culture war or political polarization lens. I study and write about evangelical culture for a living and it used to be astonishing to me how many otherwise very bright and engaged, informed and curious intellectuals and scholars of American culture and literature I’d meet who simply had NO CLUE about vast swaths of contemporary American (religious) culture that isn’t exactly hiding. After a decade or so of this work, I’ve come to expect it, and indeed, to capitalize on it (I’m writing a book right now about the cultural function of white gospel music — yes there is such a thing ... gospel doesn’t only mean BLACK gospel). But in general, you aren’t alone in having no clue about this stuff.

True. But this is such a great Oprah-esque story that I'm still surprised it hasn't gotten a little more attention.

The Party Line on Prague

| Fri Apr. 9, 2010 12:28 PM EDT

So what's going to be the Republican position on the START nuclear treaty with Russia? Fox News has already set the tone, Sarah Palin has set the party line ("It's unbelievable"), and now the Republican leadership has officially jumped in with supporting details. "There's been no ambiguity in our position on a strong missile defense, nuclear triad and the need to verify any treaty," says Mitch McConnell's flack. Spencer Ackerman is flummoxed about what the hell they're talking about:

This is quite a curious set of objections. The “unilateral” Russian references to missile defense don’t appear to be more than the Russians expressing dissatisfaction with missile defense, none of which bind the U.S. from deploying a missile shield. As for verification, for the first time in nuclear-arms treaties with the Russians, New START allows on-site inspections of Russian missile silos and nuclear storage areas — and the main reason for that is if the treaty relied on what’s called telemetry, or information about U.S. missile launches, that would potentially jeopardize missile defense by giving away too much information about the missiles that a missile-defense system relies upon. How’s that for a commitment to missile defense?

And what’s this stuff about the triad? (The “triad” is a shorthand for the three kinds of delivery systems for nuclear weapons: missiles, submarines and bombers.) Not only are all three aspects of the triad preserved in the treaty, the Nuclear Posture Review released this week explicitly preserves it. And, again, it commits the U.S. to deploying a missile defense system. All of this is public information available on the Internet.

It doesn't make much sense, but then, it's an election year. Making sense doesn't pay well. I'd say that with perhaps the exception of a few rogues, the GOP party line on START is going to be about the same as it is on everything else: No.

Which reminds me: has Obama said whether he plans to submit this as a treaty, requiring 67 votes in the Senate for ratification, or an executive agreement, which only requires 60? I haven't seen this discussed anywhere, but maybe I just missed it.

The Genius of Sarah Palin

| Fri Apr. 9, 2010 12:02 PM EDT

Andrew Sullivan comments on Sarah Palin's latest vapid comments about — well, it doesn't really matter what they were about, does it?

And so you return to the Palin conundrum. The sheer crudeness of her rhetoric, the vast ignorance it champions, and the charisma of a beautiful white woman rallying heartland male voters against commie evil is a combination it's simply impossible to grapple with effectively.

She can plagiarize Slate writers in a stream of consciousness at the Wine and Spirits Wholesalers Convention, and chirpily host a clip show, and headline Tea Party events with writing on her hand ... and somehow remain a credible figure, getting world-weary, post-everything encomiums from the likes of David Carr. And the sane WTF response — how does one do otherwise? — simply feeds the Palin media machine.

Palin is a media genius. She is a PR genius. My only question is whether she can keep it up. A big part of her success, I think, has been an instinctive notion of just how much exposure is enough, but that seems to be fading a bit. If she becomes a constant presence on our TVs, the way, say, Newt Gingrich is, she might not wear as well as she has so far. We'll see.

The Closing of the Conservative Mind

| Fri Apr. 9, 2010 1:24 AM EDT

Noah Millman asks today, "Who closed the conservative mind?" It's a pretty interesting essay written from the point of view of someone who's a conservative, but not a movement conservative. He offers several possible answers, but I want to focus on just one of them:

Is there a major patron of conservative intellectuals who is a patron primarily because he or she wants to generate new ideas, insights, works of the spirit that do not already exist in the world, as opposed to advancing arguments for ideas that are already well-established in defense of interests that are well-entrenched?

....If a multi-millionaire says: I am interested in education, and I believe that vouchers are the answer, so I’m going to give $100,000 per year to a think-tank to produce pro-vouchers research and advocate for vouchers, well, that’s not really intellectual patronage. If, on the other hand, that same multi-millionaire says: I am interested in education, and I am skeptical of the way the system works now, how we train teachers to how our schools are financed, and impressed with some of what’s been achieved following new models. I’m going to find the smartest, most informed, most independent-minded people I can, who are also skeptical of established practice, and give them money to do whatever research they want. If they can impress me with their independence and intelligence, then I want to know what they can learn with a bit of money to work with — and I want other people to know as well.

....My general impression is that the money going to purportedly intellectual conservative organs is vastly more interested in advocacy than in developing intellectual talent or generating new insights. If I’m right, then that is something that has to change if you want an open conservative mind.

But if I’m right, the question that must next be asked is: has this changed? Were things different in 1975, and if so — why? I think it would be highly instructive to see a study done on the sources of funding for conservative organs and see how these sources have changed over time — is the money coming more or less from individuals over time, from more or fewer sources, from the same or different industries, is the age of donors changing, has the place in American life of donors changed over time, etc.

My guess is that this hasn't really changed much over the years. It just seems like it. Take vouchers. I imagine that conservative think tanks of the 70s were just as single-mindedly dedicated to producing pro-voucher advocacy as today's think tanks. But in the 70s, the intellectual superstructure to support that advocacy didn't exist because the big mainstream center-left institutions like Brookings or the Ford Foundation weren't studying the issue. So conservative think tanks got busy doing research, writing white papers, developing talking points, writing op-eds, etc. This was responsible for the "intellectual ferment" that Millman associates with conservative advocacy of that era.

Today, that intellectual superstructure has long since been built. So the only thing left is to keep pressing the argument. That means repeating the same talking points, issuing slight variations on the same research, rewriting the same op-eds, and so forth. It's really the same thing they were doing in the 70s, but without the excitement of actually constructing all the arguments in the first place. That makes it seem duller and more closed-minded than it used to be.

But I suspect it's not, really. It's just that things always seem more exciting when you're doing them for the first time and fighting an insurgent campaign against an entrenched power. But once you win — or, in the case of vouchers, reach a stalemate — it's not as exhilarating anymore. That's the real difference between the 70s and today. The goals of the funders, the entrenched interests they serve, the ideas they want to promote, and the desire to construct arguments to support preordained conclusions are probably much the same.

(And why haven't conservatives been more willing to entertain new ideas over time? Good question. Liberals have retained many of the same goals over the past few decades too, but for some reason have been more willing to consider different approaches and open up whole new areas of inquiry. Global warming is entirely new, for example, and Barack Obama's healthcare reform was quite different from Teddy Kennedy's or Bill Clinton's. I'm not entirely sure what accounts for the difference, though Millman's essay proposes some fairly plausible mechanisms.)

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Banks Still Playing Games

| Fri Apr. 9, 2010 12:37 AM EDT

Tonight we have good news and bad news on the bank front. The bad news is that big banks are still playing games with their reported leverage levels. In fact, as the Wall Street Journal reports, the gameplaying is getting worse:

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks — which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. — understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show.

...."You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.

And the good news? The absolute level of short-term borrowing is going down over time. This might just be an artifact of the current low-interest-rate environment and the general deleveraging of the financial sector following the 2008 crash, but it's welcome regardless.

Gaming the System

| Thu Apr. 8, 2010 10:59 PM EDT

Did Democrats game the CBO process to get phony numbers on healthcare reform? Here's what CBO director Doug Elmendorf has to say:

I am very comfortable with the numbers we released. There are a number of people who expressed concern that we were being gamed. And I worried about that throughout the year. But I don't think we were gamed — or at least not in the sense that people seemed to be using that word.

Now, I suppose it's no surprise that the CBO director thinks the CBO did a good job. Still, he says that his office was keenly aware of the possibility of being gamed and he doesn't think it happened. And he's a pretty well respected guy. So to those who continue to claim that the process was fraudulent in some way, I think the ball is back in your court.

A Texas Mystery

| Thu Apr. 8, 2010 7:28 PM EDT

Last week Alyssa Katz wrote a piece for Big Money noting that Texas had mostly escaped the housing bubble. She attributed this primarily to a Texas rule that prohibits homeowners from taking out home equity loans that total more than 80% of a home's appraised value. I linked approvingly, but suggested that Texas's rule against prepayment penalties, negative amortization mortgages, and balloon payments had actually been more important.

As it turns out, I was wrong. In a followup, Katz explained that although Texas does indeed have these rules, they only apply to "high cost" loans — which means only loans that are less than $200,000 and have sky-high interest rates. Virtually no loans qualify under that standard, which means the rules against prepayment penalties and so forth were mostly meaningless.

So what's really going on? The restriction on HELOCs certainly helps explain why Texas had a lower delinquency rate than most of the country after the housing bubble burst. One of the sources of delinquency, after all, came from people who used their homes as ATM machines, figuring they could always refinance before the bills came due. When home prices started to fall, that option was closed and they were left with a ton of debt they couldn't pay off.

But although the HELOC rule explains Texas's lower delinquency rate after the bubble imploded, the really mysterious thing is that Texas somehow escaped the housing bubble in the first place. Why did housing prices in places like Dallas stay relatively sane even while prices in similar cities like Phoenix and Las Vegas were heading to the moon? HELOC restrictions don't really explain that. Via email, Katz pointed me to a paper by Anil Kumar, an economist at the Dallas Fed, that added some data — and some more mystery — to the picture.

Kumar notes that median household income in Texas is less than the national average and the use of subprime and Alt-A loans was higher. But take a look at the chart on the right for subprime loans. As Kumar says:

On average, Texas subprime borrowers have more equity in their homes than those in other states, providing larger cushions against default. The state relies less on exotic mortgages, such as interest-only or negative-amortization loans. Texans with subprime loans are also less likely to take out adjustable rate mortgages (ARMs), which are subject to sharply higher monthly payments when interest rates reset.

But why? Why did Texas largely avoid the "exotic mortgages" that fueled the subprime boom in the rest of the country? Why did Texas subprime borrowers — who were, on average, poorer than than rest of the country and had lower FICOs — apparently make bigger down payments?

According to Katz, Kumar attributes this to two other rules: (1) Texas has a 12-day waiting period following a mortgage application during which a borrower can back out without penalty, and (2) borrowers have to receive an itemized disclosure that includes points and fees. Kumar: "Lenders in the state are held to a higher level of transparency in their dealings....If regulation is lax they can be predators and slip exotic mortgages through the back door if a borrower doesn’t understand."

So does this explain how Texas avoided the housing bubble? There's no way to say for sure, but I'm skeptical. Can a 12-day waiting period really be enough to put the kibosh on exotic mortgages? It doesn't seem like enough — and anyway, my guess is that it was the bubble that drove the growth of exotic mortgages, not the other way around. So we're still left with a question: why didn't the housing boom ever take hold in Texas even though it seems to have all the usual sunbelt characteristics that drove the bubble in places like California, Arizona, Nevada, and Florida? It's still a bit of a mystery.

UPDATE: A possible answer here. Texas might not be the mystery at all. Maybe Phoenix and Las Vegas are.

The Junior Senator From Nevada

| Thu Apr. 8, 2010 4:45 PM EDT

Steve Benen summarizes the latest news about Sen. John Ensign starting to lose support within the GOP caucus and then sighs:

I've largely given up trying to figure out why major news outlets aren't taking this seriously. We're talking about a controversy featuring a sitting senator's adulterous affair, plus alleged ethics violations, hush money, and official corruption. An ongoing FBI investigation appears to be heating up, and by some accounts, expanding, and yet, no media frenzy.

It is sort of mysterious, isn't it? I sort of get the fact that Ensign is skating on his affair. That happens all the time. But then there's the fact that Ensign pretty clearly paid out hush money to his lover's husband, funneled through his parents in $12,000 chunks to avoid having to report it to the IRS. And the fact that he just as clearly tried to shake down some local businesses to provide a job for the guy. Plus the fact that apparently he's a total douchebag and everyone hates him. Seems like a great story!

But it goes to show the power of the news cycle. Basically, unless you're as agenda-driven as Fox News, it's hard to keep a feeding frenzy going unless you have something new to report. And there's just not enough new stuff to report on Ensign. He had an affair, he evaded IRS reporting rules, he tried to use his influence to get his lover's husband a job, and he's a douche. It's old news. What have you got for me that's fresh?